Question 1

In 1994 Pentium users around the world learned that their $4.00 pocket calculator could perform some operations more accurately than their $5,000 desktop computers.It took several months before Intel - the maker of the chip - agreed to offer its customers replacement chips.In contrast, Wal-Mart guarantees satisfaction to all customers, with a "no questions asked" return policy on nearly all of the products it sells.Why do you think these firms employ such different consumer relations policies?

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Question 2

Suppose the cost function for your firm is:

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Question 3

Beta Industries manufactures floppy disks that consumers perceive as identical to those produced by numerous other manufacturers.Recently, Beta hired an econometrician to estimate its cost function for producing boxes of one dozen floppy disks.The estimated cost function is

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Question 4

You are the manager of a monopoly firm with (inverse) demand given by P = 50 - 0.5Q.Your firm's cost function is C = 40 + 5Q².Your firm's marginal revenue is

Accepted Answer

The marginal revenue of a monopoly firm is given by MR = P(1-1/e), where e is the price elasticity of demand. In this case, the demand function is P = 50 - 0.5Q, so we can solve for Q in terms of P and substitute into the demand function to get Q = 100 - 2P. Using the chain rule, we can find the price elasticity of demand as -dQ/dP * P/Q = 2P/(100-2P) * (50-0.5Q)/Q = -1. This means that e = 1, so MR = P(1-1/e) = P(1-1/1) = P. Therefore, the marginal revenue of the firm is given by MR = 50 - Q, which is option C.

Question 5

Pic Industries produces plastic toothpicks that it sells to distributors in the Southwest.During the early 1990s, the price of the plastic it uses to produce toothpicks fell by 46 percent, due to a local glut of recycled plastic containers.Assuming that the market for plastic toothpicks most closely resembles that of perfect competition and that other firms in the industry do not experience similar cost savings in the short run, what impact would this have on the profit-maximizing output, price, and profits of Pic Industries?

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Question 6

The second-order condition for a firm maximizing its profits operating in a perfectly competitive market is

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Question 7

U.S.Airways experienced huge losses for several years in the 1990s, yet it continued to operate its fleets.Why didn't U.S.Airways shut down its operations to avoid the losses?

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Question 8

You are the manager of a firm that sells its product in a competitive market with market (inverse) demand given by P = 50 - 0.5Q.The market equilibrium price is $50.Your firm's cost function is C = 40 + 5Q².Your firm's marginal revenue is

Accepted Answer

CIn a competitive market, the firm's marginal revenue (MR) is equal to the market price, which is given as $50, hence option A is correct. Additionally, the given information does not provide a direct formula for marginal revenue based on quantity (Q), making option C also a correct interpretation under the assumption that the firm perceives its marginal revenue as decreasing with quantity, aligning with the inverse demand function's structure, albeit not directly calculable from the provided information.

Question 9

In a competitive industry with identical firms, long-run equilibrium is characterized by

Accepted Answer

In a competitive industry with identical firms, long-run equilibrium is characterized by the point where firms are producing at minimum efficient scale, where min ATC is at its lowest point. At this point, price is equal to both marginal cost (MC) and marginal revenue (MR), leading to normal profits for the firms. Thus, the correct answer is C, where MR = MC = min ATC. A and B are incorrect because they refer to price points that are not necessarily indicative of long-run equilibrium in a competitive industry. Option D is incorrect because in a competitive industry, MR is equal to price, not less than price.

Question 10

Suppose you are the manager of Alpha Enterprises - a firm that holds a patent that makes it the exclusive manufacturer of bubble memory chips.Based on the estimates provided by a consultant, you know that the relevant demand and cost functions for bubble memory chips are

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Question 11

Which of the following formulas correctly measures the profit of a monopoly?

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Both formulas D mentions, $ \pi = TR - TC $ and $ \pi = (P - ATC) \times Q $, are correct for calculating the profit of a monopoly. The first formula represents profit as the difference between total revenue (TR) and total cost (TC), while the second formula calculates profit by multiplying the difference between price (P) and average total cost (ATC) by quantity (Q).

Question 12

Keds - the traditional maker of white canvas tennis shoes - was near oblivion in the early 1980s because competitors like Nike, Reebok, Adidas, and Brooks took away many of its customers.If you were at the helm of Keds, what would you have done to turn the company around?

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Question 13

The first-order conditions for profit maximization in a perfectly competitive market are

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The first-order condition for profit maximization in a perfectly competitive market is P - (dC(Q) / dQ) = 0. This is because in perfect competition, firms are price takers and have no control over the price. Therefore, in order to maximize profits, they must set their output where Marginal Cost (MC) equals Price (P) in order to maximize profits. This is the condition represented by P - (dC(Q) / dQ) = 0.

Question 14

In a monopoly where the marginal revenue and price are, respectively, given by $10 and $20, the price elasticity of demand is

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We know that in a monopoly, marginal revenue is always less than price (MR < P). Here, marginal revenue is $10 and price is $20. Using the formula for price elasticity of demand, we get:

Price elasticity of demand = (% change in quantity demanded / % change in price)

We don't know the exact percentage change in price or quantity demanded, but we do know that in a monopoly, an increase in price leads to a decrease in quantity demanded. So, we can assume that the percentage change in quantity demanded is negative.

Let's assume the percentage change in quantity demanded is -10%.

Price elasticity of demand = (-10% / 100%) / (100% / 100%) = -1

Let's assume the percentage change in quantity demanded is -20%.

Price elasticity of demand = (-20% / 100%) / (100% / 100%) = -2

Therefore, the price elasticity of demand is between -1 and -2. The only option that falls within this range is B, -2.

Question 15

Which of the following is true under perfect competition?

Accepted Answer

Under perfect competition, firms are price takers and cannot influence the market price. Therefore, they have to sell their output at the prevailing market price. This means that the marginal revenue earned by the firm is equal to the market price. In the short run, the firm maximizes profits by producing where marginal cost equals marginal revenue. Since under perfect competition, the market price is equal to marginal revenue, this implies that price is equal to marginal cost (P=MC). Therefore, option C is the correct answer. Options A and B are incorrect because profits can be negative under perfect competition and P > MC is not true under perfect competition. Option D is incorrect because option A and B are incorrect.

Question 16

Which of the following is true under monopolistic competition in the long run?

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Question 17

Which of the following is true under monopolistic competition in the short run?

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In monopolistic competition, firms have some degree of market power and can set their prices above their marginal costs (MC) in the short run. Therefore, P > MC is true. However, profits are not necessarily always zero and P = MR is not always true. Hence, choices A, C, and D are incorrect.

Question 18

You are the manager of a firm that sells its product in a monopolistically competitive with (inverse) demand given by P = 50 - 0.5Q.Your firm's cost function is C = 40 + 5Q².Your firm's marginal revenue is

Accepted Answer

In a monopolistically competitive market, the firm faces a downward-sloping demand curve. The marginal revenue (MR) curve is therefore below the demand curve. The formula for MR is: 
MR = P + Q(dP/dQ)
Substituting the given demand equation P = 50 - 0.5Q into the MR formula, we get:
MR = 50 - 0.5Q + Q(-0.5)
MR = 50 - 1.5Q
Therefore, the firm's marginal revenue is P = 50 - 1.5Q, which is equivalent to choice B.

Question 19

Manufacturers of laundry detergent and dishwashing soap reinvest a relatively large percentage of their sales revenues on advertising campaigns.Most of these advertisements that appear on television stress the fact that their product is "New and Improved." Why?

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Question 20

In a monopoly where the marginal revenue and price are, respectively, given by $0.50 and $2, the price elasticity of demand is

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Quiz 8: Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets